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In the endless search for yield, a covered-call strategy can be an effective tool to supplement portfolio performance. In addition to finding returns from call premium, I'll try to incorporate higher quality dividend stocks for a little something extra. The guidelines for the covered-call strategy are:

  • Generating more than 7% per year from the calls and dividends combined is the overall goal.
  • Call should be at least 8% out of the money (OTM), to avoid being called away and to give room for underlying movement.
  • Targeted expirations will be within four months. Optimally calls will be written on the same underlying 3-4 times per year.
  • Buying back calls to close before expirations takes place will be taken into account; yields are calculated bid-$0.05.

The picks should be looked upon as yield generators to supplement longer-term equity holdings. The above are only guidelines, however, not rules. Before utilizing the strategy, make sure to study it and know the potential hiccups that may occur.

Annualized Call Yield performance can be calculated as such:

= (Call premium - 0.05 /Stock price)/Days to expiration*365

Prices current as of September 10, 2012 market close

Summary on selection:

I chose commodity ETFs for this article to show a change of pace from the usual stocks. The gold and silver ETFs are solid plays with all of the potential for quantitative easing and recession fears that exist right now. I truly believe both are great additions to any portfolio, and will help grow and preserve your wealth in the coming years.

The oil ETF is a more risky play in my view particularly with WTI at around 95 per barrel. The seemingly looming global depression could push the shares lower very quickly, however any supply disruptions and long-term demand will keep the price of oil elevated and rising. The point of these articles is to target option contracts in order to generate income, not recommend investments - buy and sell the underlying only after you've done your homework.

If you're already a holder of these ETFs, this strategy will be a great way to generate income while you wait for a move higher. In addition, none of these pay a dividend so this is a great way to synthetically create one.

The United States Oil ETF, LP (USO) November 39 call

Exp MonthNovember
Stock Price$35.83
Call Bid$0.75
Days to Expiration68
Call Yield1.95%
Annualized Call Yield10.49%
Annual Dividend Yield0.00%
Total Annual Yield10.49%

iShares Silver Trust ETF (SLV) October 35 call

Exp MonthOctober
Stock Price$32.28
Call Bid$0.46
Days to Expiration40
Call Yield1.27%
Annualized Call Yield11.59%
Annual Dividend Yield0.00%
Total Annual Yield11.59%

SPDR Gold Trust ETF (NYSEARCA:GLD) November 179 call

Exp MonthNovember
Stock Price$167.30
Call Bid$1.81
Days to Expiration68
Call Yield1.05%
Annualized Call Yield5.65%
Annual Dividend Yield0.00%
Total Annual Yield5.65%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.